patrick.net

Plenty of blame to go around, and faulty credit-scoring will no doubt get its share of the blame. However, the consumer credit-score companies were fairly up-front about their statistical methodology - it was pretty clearly represented that the score was based on that individual's past credit behavior.

As a lender of large sums of money, it should have been the banks that scrutinized individual cases to not just look at a "score", but determine the actual debt-servicing ability of the borrower and the real value of the collateral.

In their rush to generate volume, the lenders (and the rest of the chain from MBS-peddlers to mortgage brokers) pretty much cherry-picked the facts and ignored things that would slow this down. IMHO, the consumer credit-rating agencies were a small part of the problem.

As has been said, lots of fault to go around, but I agree that credit scoring was a small player except, perhaps, where it was over-relayed on by a lending company.
What really irks me about the credit card companies is their, "We can't lose" attitude. Give credit to someone you KNOW will default? So what? Call it a cost and pass it on to rest of the credit world.
Umm what?
If my rate is affected by others I would like to have something to say about who credit card companis extend credit to. If my 8% line goes to 12% because VISA swelled its ranks of borrowers with people who are not responsible with credit, then I have a problem.
Peter P would undoubtedly say, "Just pick another credit company."
But then, rates are set by 'what the market will bear'. If Mastercard raises its rates to 12% because of their defaults, an VISA is smarter by picking better members, VISA will simply raise their rates to 11.5% and start reporting great profits.
Peter would again say, "Just investin VISA then" but you can see that the only real way for the market to work is to have extremely deep pockets - not an option for most.
I thnk credit cards companies need a strng dose of regulation - and we are already seeing that on its way.

I have to say I'm extremely disappointed with the "solutions" that are being proposed to the housing crisis. All I hear about are plans to keep people in houses that they really can't afford. Is anyone in a position of authority trying to ensure that this doesn't happen again on such a large scale?

I'm all for free markets... that means a favorable outcome for a job done well, and an unfavorable outcome for a job that's poorly done. There needs to be a chain of accountability in the mortgage origination process. Brokers, appraisers, and everyone else involved needs to experience some significant negative consequence for enabling a buyer to obtain a loan that he ultimately defaults on.

Without some sort of feedback mechanism, we are setting ourselves up to do this all over again in the future.

Thanks for listening,

STCM

Without some sort of feedback mechanism, we are setting ourselves up to do this all over again in the future.

History does rhyme.

Positive feedback causes oscillations.

OT:

Do anybody know a good site & model to buy scooter/moped online (50cc & under)? I would like to buy one for my office commute. I don't need to use a freeway.

Thanks.

I'll sell you my 150cc '03 Aprilia Scarabeo. I've been thinking of getting rid of it for a while now. It's never been on the freeway even though it's just barely legal. But you'll want the extra hp for even El Camino Real type driving where folks regularly go from 0 to 45mph between stoplights. A 50cc is dangerous unless you're only driving it past schools when the crossing guards are out.

Mine is just like pictured except a dark wine red color & I have the tall windscreen.

For city driving, you really need a vehicle with superb side-impact crash rating. A scooter is not safe at any speed.

If you only drive for short distances, it is better to get a used large sedan because gas is not going to cost much anyway.

But scooters are a blast. lol. I really enjoyed commuting from Belmont to Redwood City back when I lived down there on my scooter. Of course an armored Suburban would have been safer, but you can stay reasonably safe on a scooter. Just assume that every single other human being in sight and out of sight is trying to kill you. That includes granny standing on the curb with her groceries.

Of course I didn't mean to say that I 'lived on my scooter'; somewhere an English teacher is crying a tear.

sa:
For something a little different than the rest, try an eGo. No tailpipe emissions.

RE: No tailpipe emissions.

Big diesel trucks have no tailpipe emissions. They have chimneys.

Randy,

Thanks for the offer, I live a long way from El Camino Real (Bay Area). I lived around there during dot com boom.

Peter,

I live in a town of 12,000 people and it's relatively safe driving a scooter.

EBG,

I really need it to go 35-40mph, the only road alternate to freeway has a 40mph speed and it's single lane without a bike lane.

I live in a town of 12,000 people and it’s relatively safe driving a scooter.

Still... please be vigilant, my friend.

I really need it to go 35-40mph, the only road alternate to freeway has a 40mph speed and it’s single lane without a bike lane.

See. And people drive too fast in those roads.

Thanks for your concern peter. I really need to take a video and post it for you to get an idea of the traffic around here. It's very low traffic and people (if any) maintain a huge distance between cars. I barely see a few cars when i drive back and forth.

furthermore, why can’t I have a say in who my bank loans money to?

Of course you have a say. But it is your bank only if you own a controlling stake of the bank.

Talk to a lawyer.

TOB, then you can *really* live up to your name :-).

LOL!

TOB,
What about credit unions? Or are they not to be trusted?
justme,
Never have bought a new car, but I will stand in line for a diesel hybrid (go VW).
My bad on abusing catalyst -- how about energy dense, sacrificial membrane?

EBGuy,

It may take a while. Maybe better just to get the clean diesel Jetta 2.0 TDI in September. I'll stand in line with you :-).

The best way to clean up the air is to charge polluters a clean-up fee (NOT tax).

The market will then compel consumers to make the right choices.

There would be no need to worry so much about who's to blame if the parties that make bad decisions also pay for it.

For instance, if a lender makes bad loans without proper research there is absolutely nothing wrong with that AS LONG AS they suffer the consequences and not the tax-payer.

What's good for the lender is also good for the borrower.

As long as rights and responsibilities go together, the market will figure things out.

In this particular question, say lenders were completely on the hook for the bad loans. And also suppose they were misled because they relied too much on credit reports, which are faulty. Well, they would learn their lesson and adjust the way they calculate risk in the future. They would rely less on credit score and pay attention to more things.

However, this is all in the ideal free-market scenario. Since we the tax-payers will end up bailing out both sides of the equation, no lessons will be learnt by lenders and the borrowers.

Tomorrow, if there is a bubble in something, say daisies, lenders will continue to make bad loans and borrowers will continue to make malinvestments because the "compassionate" government will bail them out using the average joe's hard-earned money.

In this particular question, say lenders were completely on the hook for the bad loans. And also suppose they were misled because they relied too much on credit reports, which are faulty. Well, they would learn their lesson and adjust the way they calculate risk in the future. They would rely less on credit score and pay attention to more things.

In many cases it wasn't even a matter of poor risk management technique. The players were simply motivated to game the system in any way possible to push the paperwork through and collect their commission.

STCM

As long as rights and responsibilities go together, the market will figure things out.

Even with a highly distorted reality, the market will still figure things out. It will just be a bit messy.

I see the market as a manifestation of human actions and reactions. It is simply an extension to Nature.

Peter, the market exists. In spite of all the machinations of the control freaks who come to power, as long as there is society, there is a marketplace. To that extent, I agree with you.

I am not sure about the market "figuring it out". Are you saying the best possible outcome will always be reached regardless of whether the marketplace is free or not. I find that hard to believe.

Force and coercion, in many other countries (and this one), have caused abject poverty. Until freedom happens, that situation doesn't get alleviated. That has been observation.

TOB, just do what I do and lend through a broker. I get 12% on my money.

Malcolm,

care to elaborate on what kind of broker that is?

Are you saying the best possible outcome will always be reached regardless of whether the marketplace is free or not. I find that hard to believe.

In an imperfect market, the "best" outcome is always a moving target. So yes, it will not be reached. However, the market still tries to move towards some equilibrium point at all times.

Oh ho.

My little speculations on EU vs. the Fed are now being detailed by smarter and better researched people. Go Mish!

Patricks link to: http://globaleconomicanalysis.blogspot.com/2008/06/central-banks-clash-over-monetary.html?ref=patrick.net

Notable comment, "The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe."

Things are different now. The entire EU is up against the US and we are roughly equel in economic strength. However, the US massive outstanding debt in other regions curreys support for favorable US outcomes. I had always wondered if the EU could break through to become the dominant central banking force. The answers is now clear to me. We will repeat the early 1990s. Big recession in Europe, ironically a now slightly smaller recession in the US (but still a good ol character revealing, learn-how-to-budget-and-hope-you-don't-lose-your-job recession) and rising geo-politcal tensions where oil-producing nations re-learn that fast, large run-ups in oil are not in their best interest.
The key to long term US recovery will be how well we shift back to manufactoring. The belief is that capitalism will respond faster and thus blunt the worst of our version of Japan's 'lost decade.' I tend to agree, but we will need to undo the worst of the NAFTA abuses. We cannot outsource jobs to partners that do not follow the rules.

Duke,

I read the link and the basic premise seems to be that a differential in interest rates between Europe and USA is causing some kind of stress on the "financial system". And Morgan Stanley wants ECB to lower their interest rate so that rate(FED)=rate(ECB), ideally.

But why will that help? I just don't see it. It is possible that MS has some self-interest in rate parity, but why is this so important. Why will the weak dollar cause inflation in Europe? It should be the other way around. Or is it the Oil/$ effect? I don't "get" the big picture here.

Put in another way:

What is it a about interest rate disparity that implies that Fed and ECB are "squabbling", or that Europe and USA are "up against each other"? Does Mish explain that?

I have tried to read the comments to the article and did not find much explanation, really.

http://www.dqnews.com/News/California/Bay-Area/RRBay080618.aspx

Bay Area home sales return to record low in May

REO Speedwagon, from the DQ report:
Bay Area home sales return to record low in May
The impact was greatest in inland counties: Solano County's foreclosure resales were 57.6 percent of the resale market; in Contra Costa they were 43.3 percent and in Sonoma 26.6 percent. It was much different on the coast, where foreclosures resales were just 5.8 percent of the resale market in San Francisco and 4.5 percent in Marin County. Alt-A Bay is next...

FYI, az_lender on the HBB has a good business lending to those who live in manufactured homes...

Since when is Sonoma an "inland county"? Or did you guys move it after I left the Bay Area?

Since when is Sonoma an “inland county”? Or did you guys move it after I left the Bay Area?

Soon, Alameda County will be considered inland.

Anybody want to handicap today's TSLF auction? Its a Schedule 2 with $75 billion of Treasuries to swap. Last round (28 days ago), they got bids for ~$50 billion. I am guessing it should increase around $10 billion to $60 billion.

Justme,

I see the issue in the EU as this:
The rate differential is having the effect of making US consumers have to spend more dollars per same item exported from EU. This is on excahnge rate alone. We are printing lots of dollars. They are printing far fewer Euros. This means the EU export driven economy (or econmies) is really hurt as th US simply either stops buying their stuff or we ask them to discount it.
In a seperate issue it is true that a weak US dollar is helping fuel a global oil/food inflation spike. Since the high inflation in the EU is mostly restricted to food and fuel we are spiking inflation there. Sadly, and as Mish correctly points out, you cannot solve an oil/food inflation of this type with monatary tightening. So, higher rates are not solving the problem at all. In stead, you simply get business contraction. That's contraction on top of what you get from the ailing export problem.
In the end, it looks like the EU will pursue their (wrong) tight monetary policy and they will drive their economy into a recession. This is turn will help the US as most people in a recession are happy for work and tend to expect lower wages and lower standards of living. The US, who is due the same expectation, can offset some of their belt tightening with the belt tightening seen elswhere.
Now, if the rates moved in conjuction they would tend to avoid the differential problems. No brakes on economic expansion, no misguided attempts to 'control (the uncontrolable) inflaton' and less of a problem to their export industries.
In the end, we are seeing that the world is still very much tied to the US cnsumer. All of the theories about decoupling are proving to be very false. Or at least, no one is willing to test those theories.

Duke,

Sounds like EU is against lose monetary policy and the associated bailouts. And the US are for the same items. Then who is "wrong"?

Duke,

Thanks for explaining clearly.

Would US have similar issues if they were to raise rates and commodities demand doesn't drop off from rest of world?